Testing the preparedness of tax preparers

Will the IRS' new licensing regulations help or hurt taxpayers?

Three tax preparers in mid-March sued the Internal Revenue Service over new licensing regulations.

Under Circular No. 230 announced in June, all registered tax preparers must add to all documents they file an identification number, which they earn by passing a 120-question federal competency exam by December 2013 and completing 15 hours of continuing education to stay current on tax laws.

The requirement costs not only time but also money: Registration is $64.25, the renewal fee is $63, and the annual exam is $100 to $125, the IRS said.

"If a preparer cannot pass a basic competency test and does not take courses to remain up to date on tax law changes and understand his or her ethical responsibilities both to clients and to the tax system, that individual should not be preparing tax returns for compensation," Nina E. Olson, the national taxpayer advocate within the IRS, said in a statement this month.

The new rules stem from reviews by Congress' investigative arm, the Government Accountability Office. In 2006, the most recent data available, the GAO looked at tax returns filed by 19 outlets of several tax preparation chains, and "all 19 returns had mistakes ranging from refund overclaims of nearly $2,000 to underclaims of over $1,700."

The government argues that the licensing rules will improve the accuracy of tax returns and of preparers, but the Institute for Justice in Arlington, Va., which filed the lawsuit on behalf of the plaintiffs, disagrees. It argues that the regulations are too costly and will put mom and pop tax preparers out of business while giving lawyers and certified public accountants, who are exempt from the regulations because of their more stringent testing and education requirements, an unfair advantage. That, the institute said, will raise costs for taxpayers.

Stephen W. DeFilippis, member of the Illinois Society of Enrolled Agents and an agent at Wheaton-based DeFilippis Financial Group, and John Tillman, chief executive of the Illinois Policy Institute in Chicago and Springfield, discuss the IRS regulations.

Q: What do you think of the requirements?

DeFilippis: It's a long time coming when you think about the fact that someone who cuts your hair has to have a license. When they do a bad job, it grows back. But someone dealing with your finances … could have very severe ramifications.

Tillman: The people who get hurt by this the most are the taxpayers. People start a businesses with $20,000 or $30,000, and when you have to start spending $5,000 to do your taxes as opposed to $500, that's a much larger expense.

This is very much like the guilds of old. The whole purpose was to prevent low-cost competition. It hurts the poor and upcoming entrepreneurs.

Q: Are the licensure costs too expensive?

DeFilippis: If this is going to be your profession, you have to invest in it. If you have to pay for continuing education to maintain your status, that's an investment in your profession. There are a lot of professions that have the same education requirements, so it's not that unusual.

Tillman: The government makes the tax code extremely complicated, so people use tax preparers. It's so complicated, so they find the best services for the least cost. But it's too complicated for even these preparers. It's a real problem that we spend billions of dollars a year on tax code compliance. We're becoming like India, which is well known to have a highly regulated society.

Q: How do the costs and time associated with the new regulations affect mom and pop tax preparers?

DeFilippis: Many organizations give these classes, so it shouldn't be difficult to meet those requirements. The IRS has just started approving the vendors to offer the classes, but that's just going to keep expanding. This test is not a huge hurdle. If you've been doing taxes, you're going to know most of the content on the test. So to say that it's going to prevent you from being in business, then you shouldn't be in that business.

They're trying to raise this to a professional level, and it should be at a professional level.

Tillman: The cost is two(fold): The paying of dollars and then the time and the bureaucratic compliance issues. The IRS requires 15 hours of continuing education. That is a lot of time, especially during the tax season. It's the hassle. I know this because we're a fairly large nonprofit, highly regulated entity, and I spend tens of thousands of dollars a year hiring attorneys to comply with government regulations.

Q: How are consumers affected?

DeFilippis: If you compare the fees between enrolled agents and nonlicensed preparers, you're not going to see a huge difference. Personally, what I have to pay to be an (enrolled agent) has no impact on what I charge.

Q: The Institute for Justice, which filed the federal lawsuit, said licensure in the U.S. workforce, in general, has increased to 30 percent in 2006 from 5 percent in the 1950s. Is that a positive thing?